Gallaher Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 March 2019 |
| Neutral Citation | [2019] UKFTT 207 (TC) |
| Date | 25 March 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 207 (TC)
Judge Tony Beare
Mr Philip Baker QC and Mr Imran Afzal, instructed by Freshfields Bruckhaus Deringer LLP, appeared for the appellant
Mr Rupert Baldry QC and Mr Ben Elliott, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Whether the UK legislation in relation to intra-group disposals is compliant with EU law – Consideration of the applicable freedoms – Whether or not the provisions in question restrict a freedom – Whether or not the provisions can be justified by the lack of objective comparability of situation or by reference to the balanced allocation of taxing powers between member states – The proportionality of the restriction – The doctrines of conforming interpretation and disapplication – Consideration of movements of capital – In relation to the disposal of shares to the Dutch resident parent company – Disapplication of the restriction limiting no gain/no loss disposals to transferees within the UK tax net – In relation to the disposal of intangible assets to the Swiss resident sister company – Whether UK legislation compatible with EU law.
The FTT held that the chargeable gains and intangible fixed asset group transfer rules restricted EU rights of freedom of establishment.
This case involved two disposals. The 2011 disposal involved the disposal of intangible fixed assets (brand rights) by the UK-resident Appellant company to a Swiss-resident member of the same group of companies. The 2014 disposal involved the disposal of shares in a 100% subsidiary of the Appellant to a Netherlands-resident member of the same group of companies.
The 2011 disposal did not satisfy the conditions for a tax neutral transfer because the transferee company was not, as required by CTA 2009, s. 775, within the charge to UK corporation tax (whether by virtue of UK residence or by virtue of trading in the UK through a UK permanent establishment).
Similarly, the 2014 disposal did not satisfy the conditions for a no gain/no loss transfer because the transferee company was not, as required by TCGA 1992, s. 171, within the charge to UK corporation tax (whether by virtue of UK residence or by virtue of trading in the UK through a UK permanent establishment).
The relevant provisions outlined above are collectively referred to as the group transfer rules in the remainder of this summary.
In relation to the 2014 disposal, the following matters arose:
- Whether the fact that the disposal did not fall within the group transfer rules (and therefore gave rise to an immediate payment of corporation tax by the Appellant in respect of its disposal of the subsidiary shares to the Netherlands-resident group member (JTIH), and would not have given rise to such a requirement had JTIH been a UK resident parent company) means that the group transfer rules create a restriction on JTIH's freedom of establishment. In this regard, the FTT held that the group transfer rules did restrict JTIH's freedom of establishment.
- Whether the corporation tax charge can be justified on the grounds that the situation involving JTIH (as a Dutch resident company outside the UK tax net) in relation to that transfer was not objectively comparable to the situation which would have pertained if JTIH had been within the UK tax net. On that basis, the FTT found that the restriction is not so justified.
- Whether the charge to corporation tax can be justified by overriding reasons of public interest – namely, the objective of ensuring the balanced allocation of taxing powers between EU member states. On these grounds, the FTT held that the restriction is justified.
- Whether the requirement to pay the whole of the corporation tax liability immediately went beyond that required to attain the balanced allocation of taxing powers, and whether the UK legislation should have allowed an option to defer the payment obligation. In this regard, the FTT found that the requirement is not proportionate.
- Whether the group transfer rules should be given a conforming interpretation in such circumstances to defer paying the corporation tax until the asset in question is disposed of outside the JTIH group. In this regard the FTT held that the restriction would be proportionate if it were to provide for the tax in question to be paid in instalments. However, as there are various possible instalment payment bases which would be proportionate in this context, it is not within the competence of the UK courts to remedy the existing disproportionate restriction by selecting one of those options and applying the doctrine of conforming interpretation to treat the selected option as incorporated in the legislation.
- Whether, in the alternative, the only appropriate remedy in this case is the disapplication of the relevant parts of the UK legislation. In this regard, it follows from the decision in point (5) above that it is necessary to disapply the existing exclusion from the group transfer rules for intra-group disposals to transferees which are outside the UK tax net in circumstances where that exclusion constitutes a restriction on the freedom of establishment. Accordingly, TCGA 1992, s. 171 should apply in those circumstances even though the transferee is not within the charge to UK corporation tax.
The following additional matters arose in relation to the 2011 Disposal:
- Whether, notwithstanding that the Swiss group member (JTISA) was resident outside the EU, the UK legislation creates a restriction on the freedom of establishment of its Netherlands-resident parent company (JTIH). In this regard, the FTT held that, although it is necessary to consider freedom of establish, the fact that the same liability would have arisen even if JTIH had been within the charge to UK corporation tax means that the group transfer rules do not create a restriction on JTIH's freedom of establishment in the UK.
- Whether, in the alternative, UK legislation creates a restriction on the freedom of the Appellant and/or JTIH to move capital. In this regard, the FTT held that it is not necessary to consider whether the group transfer rules create a restriction on JTIH's or the Appellant's freedom to move capital.
This case confirms that the exclusion of the application of the tax neutral group transfer rules (in both the chargeable gains and intangible fixed assets legislation) for companies not within the charge to UK corporation tax can be disapplied in circumstances where the exclusion constitutes a restriction on a taxpayer's EU right of freedom of establishment.
Given the number of ECJ decisions relating to the validity of various aspects of UK tax legislation in the light of the EU fundamental freedoms it is perhaps surprising that this issue has not previously been addressed by the courts. All taxpayers who may have made disposals in similar circumstances should review their position in the light of the judgment.
| Glossary of cases | 4 |
| Introduction | 7 |
| The relevant facts | 7 |
| The relevant issues | 10 |
| The relevant law | 11 |
| The relevant provisions of the UK domestic legislation | 11 |
| The relevant provisions of EU law | 17 |
| Discussion | 28 |
| General overview | 28 |
| Questions to be addressed in relation to each Disposal | 35 |
| Summary of conclusions | 36 |
| The 2014 Disposal | 37 |
| Which freedoms? | 37 |
| Is there a restriction? | 40 |
| Can the restriction be justified by the lack of objective comparability? | 41 |
| Can the restriction be justified by the need for the balanced allocation of taxing powers? | 45 |
| The exit tax cases | 45 |
| NGI | 45 |
| Portugal 2 | 47 |
| Denmark | 48 |
| DMC | 48 |
| Germany | 49 |
| LabTec | 50 |
| Panayi | 51 |
| A Oy | 52 |
| Main points arising from the exit tax cases | 52 |
| Is the restriction proportionate? | 55 |
| How should the national court respond in the case of a restriction on an EU freedom which is disproportionate? | 58 |
| The doctrine of conforming interpretation | 59 |
| The submissions of the parties in relation to conforming interpretation | 63 |
| Conclusion in relation to conforming interpretation | 66 |
| Which party's conforming interpretation? | 66 |
| The role of the UK courts | 76 |
| Disapplication | 83 |
| Conclusion in relation to the 2014 Disposal | 87 |
| The 2011 Disposal | 88 |
| Which freedoms? | 88 |
| Freedom to move capital | 88 |
| Freedom of establishment | 97 |
| Is there a restriction? | 97 |
| Thin Cap | 102 |
| Conclusion | 114 |
| Right to appeal | 114 |
[2] This decision contains references to the following cases:
| Case abbreviation | Full name of case and reference |
| A Oy | A Oy (Case C-292/16) [2017] ECR 00000 |
| Autologic | Autologic Holdings plc v IR Commrs (Loss Relief Group Litigation) [2005] BTC 402 |
| BT Pension Scheme | Trustees of the BT Pension Scheme v R & C Commrs [2013] BTC 1,656 |
| Cadbury Schweppes | Cadbury Schweppes plc v IR Commrs (Case C-196/04) [2008] BTC 52 |
| Class IV ACT | Test Claimants in Class IV of the ACT Group Litigation v IR Commrs (Case C-374/04) [2008] BTC 305 |
| Denmark | EC Commission v Denmark (Case C-261/11) [2013] ECR |
| DMC | DMC Beteiligungsgesellschaft mbH v Finanzamt Hamburg-Mitte (Case C-164/12) [2014] BTC 16 |
| EV | EV v Finanzamt Lippstadt (Case C-685/16) [2018] ECR 0000 |
| Felixstowe | Felixstowe Dock and Railway Company Ltd v R & C Commrs (Case C-80/12) [2014] BTC 19 |
| FII 1 | Test Claimants in the FII Group Litigation v IR Commrs (Case C-446/04) [2008] BTC 222 |
| FII 2 | Test Claimants in the FII Group Litigation v IR Commrs (Case C-35/11) [2013] BTC 424 |
| Fleming | Fleming (t/a Bodycraft) v R & C Commrs [2008] BVC 221 |
| Germany | EC Commission v Germany (Case C-591/13) [2015] BTC 15 |
| Ghaidan | Ghaidan v Godin-Mendoza [2004] 2... |
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